Good afternoon, and welcome to Herman Miller's third quarter earnings conference call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kevin Veltman, Vice President of Investor Relations and Treasurer.

Good afternoon, everyone. Joining me today on our third quarter earnings call are Andi Owen, our President and Chief Executive Officer; and Jeff Stutz, our Chief Financial Officer. We have posted today's press release on our Investor Relations website at hermanmiller.com. Some of the figures that we'll cover today are presented on a non-GAAP basis. We've reconciled the comparable GAAP to non-GAAP amounts in a supplemental file that can also be accessed on the website. Before we begin our prepared remarks, I will remind everyone that this call will include forward-looking statements. For information on factors that could cause actual results to differ materially from these forward-looking statements, please refer to the earnings press release we issued last night as well as our annual and quarterly SEC filings. At the conclusion of our prepared remarks, we will have a Q&A session. We will limit today's call to 60 minutes and ask that callers limit their questions to no more than three to allow time for all to participate. With that, I will turn the call over to Andi.

Good afternoon and thank you for joining us today. I'll begin our call by sharing a few thoughts on our results for the third quarter, some perspective on the current macroeconomic picture and progress on our strategic priority. After that, I'll turn the call over to Jeff and Kevin to provide more information on our financial results. Consolidated sales at $619 million for the quarter were 7% higher than the same quarter last year on a reported basis and 6% higher organically. New orders in the quarter totaled $611 million and reflected broad-based organic order growth of 8%, led by strong performance from our ELA business and continued double-digit growth from our consumer business. This quarter, we're reporting year-over-year gross margin expansion for the first time in nine quarters. Our latest price increase and profit optimization work began to gain traction. Sales growth, expanded gross margin and well managed operating expenses combined to deliver adjusted operating margin of 7.9%, that was 50 basis points higher than last year. We've reported EPS on a GAAP basis of $0.66 during the quarter. On an adjusted basis, we reported EPS of $0.64, which reflected an increase of 28% over the same quarter last year. While the broader geopolitical environment is mixed with uncertainty surrounding Brexit, global trade tensions and recent stock market volatility, underlying market fundamentals in our space remain positive. North America contract industry growth is measured by BIFMA, remains robust and has been relatively consistent over the past 10 months. Service sector employment continues to rise and architectural billings levels have been positive for the past 12 months. In fact, the architectural billings reading in January was the highest level in over two years. We're also encouraged that progress appears to be occurring in trade negotiations between the US and China,…

Thank you, Andi, and good afternoon everyone. Consolidated net sales in the third quarter of $619 million were 7% above the same quarter last year on a GAAP basis and up 6% organically after adjusting for the impacts of year-over-year changes in foreign currency rates and the adoption of new revenue recognition rules earlier this fiscal year. New orders in the period were 8% above last year. Within our North American segment, sales were $321 million in the third quarter, representing an increase of 1% from last year on a reported basis and essentially flat with last year organically. New orders were $314 million in the quarter, up 7% on a reported basis and 5.5% organically over last year. The order growth in North America this quarter was led by large and medium sized projects, with geographic increases coming from the Eastern and Western regions of the US. Our ELA segment reported sales of $126 million in the third quarter, an increase of 23% compared to last year on a reported basis and up 24% organically. New orders totaled $127 million, representing growth for approximately 12% over the same quarter a year ago on a GAAP basis and 11% organically. As the ELA business had a difficult prior year growth comparison, this order performance was particularly strong as organic order growth last year was 27%. The year-over-year performance was led by growth in India, China, Mexico and the Middle East, more than offsetting lower demand levels in the UK and Mainland Europe as the uncertainty related to Brexit persists. Sales in the third quarter within our specialty segment were $76 million, an increase of 5% from the same quarter last year on a reported basis and 4% organically. New orders in the quarter of $77 million were 8% higher than…

Thanks, Jeff. We ended the quarter with total cash and cash equivalents of $114 million, which was consistent with the level of cash on hand last quarter. Cash flows from operations in the third quarter were $39 million, reflecting an increase of 34% over the $29 million generated in the same quarter of last year. Capital expenditures were $22 million in the quarter and $63 million year-to-date. For fiscal 2019, we anticipate capital expenditures of $85 million to $95 million for the full year. Cash dividends paid in the quarter were $12 million and we've repurchased $6 million of shares during the quarter. We remain in compliance with all that covenants and as of quarter end our gross debt-to-EBITDA ratio was approximately 1:1. The available capacity on our bank credit facility stood at $165 million at the end of the quarter. Given our current cash balances, ongoing cash flow from operations and total borrowing capacity, we remain well positioned to meet the financing needs of the business moving forward. For that update, I'll now turn the call back over to Jeff to cover our sales and earnings guidance for the fourth quarter of fiscal 2019.

Okay, thank you, Kevin. So with respect to the forecasts, we anticipate sales in the fourth quarter of fiscal 2019 to range between $645 million and $665 million. The midpoint of this range implies an organic revenue increase of approximately 5% compared to the same quarter last fiscal year. We expect consolidated gross margin in the fourth quarter to range between 36.3% and 37.3%. This estimate, of course, includes the impact of adopting the new revenue recognition standard in fiscal 2019, which as I described earlier, impact year-over-year comparability by approximately 60 basis points. Adjusted for this change, the midpoint gross margin forecast is approximately 50 basis points higher than the fourth quarter of last year. This forecast reflects sequentially lower steel costs next quarter compared to the third quarter and benefits from our profitability improvement initiatives. Operating expenses in the fourth quarter are expected to range between $180 million and $184 million. We anticipate earnings per share to be between $0.76 and $0.80 for the period, and our assumed effective tax rate is between 21% and 23%. So with that overview, I'll turn the call back over to the operator and we'll take your questions.

Thank you [Operator Instructions]. And our first question comes from the line of Budd Bugatch with Raymond James. Your line is now open.

Good afternoon. A question for you on North America, just cut through the chase. Organically, it was flat year-over year, can you give us a little bit of color on that, Andi or...

I'll provide a little color and then Andi jump in if you have something understanding, if you having to add. So, yeah. So we were organically flat year-over-year, Budd. There's really a couple factors that play. The largest factor really related to the way orders paid going back to the second quarter versus how they paid this quarter. You go back to Q2, order entry in that period for the North American contract business was fairly front-end loaded or more front-end loaded, so we saw more of those orders translate to revenue in that particular period. And this kind of have the opposite effect this quarter where we had -- because of two factors, we had a price increase that was announced. And so we had some orders that came in and just were long-dated and so pushed out of the quarter as well as, just in general, more back-end weighted order entry. So it was more a timing issue. The other thing I would add and we didn't have in our prepared comments is the impact of federal government in the shutdown that happened mid-quarter, our best estimate would be that impacted as negatively on revenue to the tune of somewhere between $2 million and $4 million and my guess would be a view toward the upper-end of that range.

[Indiscernible] I was going to go from there to the order book and just see where the backlog and where you're thinking fourth quarter will come in on North America?

I think, in general, so our backlog -- maybe just a few comments on the backlog, Budd, to level that. So total backlog drop I think 13% year-over-year. This, as with revenue and gross margin, is impacted by our revenue recognition adoption. And so you need to adjust that for the impact of those dealer payments that seems to be kind of rattling through the whole P&L. And, as a result, the adjusted backlog growth is closer to 11% on an adjusted basis, when you take that into effect. So that's just kind of the starting point. And here again, as I mentioned, the order patterns that came in the quarter, we saw a number of orders come in that are longer dated, that push out of Q4 actually into even the first part of the fiscal year and I think our guide implies and this is in total, but I think fairly close for the North American contract business as well. It implies an expected order growth somewhere in the 5% to 6% range.

So that's your revenue guess for fourth quarter for North America?

Yes, on that order. But in total, it's up, I think, 5% organic and that would be, Kevin, keep me honest here, I think that would be -- on order of magnitude that would be what we'd expect North America contract to be maybe a little better than now.

And then just going in the consumer and DWR and the studio business, can you give us a flavor of what was going on there? I think you said, well, I didn't quite catch what you said about revenues and earnings, give us a little bit of the help on that?

I think from a consumer standpoint, Budd, I mean, the business continues to grow very strongly in the top line, I think we've seen 12 straight quarters of revenue growth. And while margins are still very respectable, they're not exactly where we would like them to be for a number of reasons. The biggest one is the one that we've continued to talk about since I've been here, which is the free ship kind of ship rev in and out. I think we underestimated, as we put our plan this year, the amount of a change in the customer behavior around free shipping. And so, we've had to see again react to that little bit of information that's -- to give us a little bit of a ding on our profitability. We've also been investing quite a bit in growing. So as we build the HAY brand in North America, there's the marketing expense as we expand studios. So now we have four DWR studios opening this quarter, which is actually a pretty large amount for us. So you have pre-opening expenses for those as well as the two HAY studios we've opened. So, I think we're in investment mode with our consumer business right now. We're very pleased with the revenue that we're seeing and we're working in a very focused way on improving the profitability and we will continue to see that profitability get better. I will say from this quarter and as we go into Q4, we're in the process of relocating our distribution center and along with that we've had some unforeseen expenses around storage of merchandise, along with our great revenue growth we've had order growth and shipment growth, so we need a larger facility. So we will see some expenses in the next couple of quarters related to the DC transfer. After that, as we head into next year, we should see that level out a bit. Would you add anything to that?

Well, I did see operating expenses grow like twice the level. We're not nearly twice the level of gross profit growth and operating expenses -- we are operating of roughly $4.3 million in gross margin with gross number was up was up $2.4 million, if my numbers are right. So...

So maybe a little more color Budd and then if I don't get it -- if I don't hit this question, I'll come back to it. But at the gross margin level, we're down about 200 basis points. And as Andi said, we had the impact of more free shipping and lower freight revenue, so just higher net freight expenses. We have the impact of our DC move, so we had some, I would call, temporal increase in storage costs for inventory as we are -- we build ahead of it for the HAY launch and we are moving to a much larger space with high bay capability that will give us an ability to house our distribution -- or cover our distribution needs, I should say. But in the interim here, we had to do some offsite storage, that drove some increased cost. And then the other thing that, it was the launch of HAY and this is just project mix. We had a higher content running through our gross margins and consumer this quarter related to contract business, in particular a large contract project that just diluted the gross margin improvement for that segment. Now, that's not something that we think is representative of longer term mix, but it happened to affect us this quarter and it actually happened to affect us last quarter a little bit as well to the same -- for the same project. So when you put all those together, Budd, that was the big drivers behind that 200 basis points declining gross margin. And if I had to peg it, I'd probably say each of those factors accounted for about a-third of that decline. When you shift in those it gets to your question on operating expenses, when you shift to the increase in operating expenses, it's a couple of things; a fair amount of marketing cost related to the HAY launch that we're incurring as well as, and this is the frustrating part of lease accounting is that, we have these new stores, therefore I can change it, but we have these new stores opening that we have no revenue in throughout the third quarter, but we have all of the operating or the occupancy costs, because we have possession and so we're booking that on a straight line basis and it hit its hard this quarter. So that's a big driver of the year-on-year as well.

And to add to Jeff's point, opening four stores in a quarter is an unusually large load for us, so the pre-opening expenses are larger than normal.

Thank you. And our next question comes from the line of Steven Ramsey with Thompson Research. Your line is now open.

Thinking again about consumer, I guess to step back and think about your investment outlook there on maybe more of a qualitative basis, how are you measuring internally the return on capital in this business? And continuing to invest at a high rate, should we see that play out in sales growth continuing at a double-digit or even mid-teen rate over the next year or two? And if you were, in theory, to ease up on investments, would we see cost of sales and OpEx go down and operating margins move up pretty significantly if you were to pull back on growth investments?

So, Steven, I'm sure Andi has probably a better answer on the qualitative factors here, but let me give you just some thoughts and it's interesting -- those are conversations that we're always having, right. The balance that we're trying to strike is we see and continue to be big believers in the long term strategic value of growing this consumer business to Herman Miller, to our shareholders. And it has been a slow walk, right, because we're in this mode of putting in place new studios that take time to get to maturity. And I know you've heard this from us before, but when you're in a mode of adding new store, you can never seem to catch up to the kind of profit traction you need when you're layering on the overhead and to Budd's earlier question, you're seeing the overhead ramp up in this business and we don't have just the benefit of leveraging that through revenue in these new immature studios. So your question is -- it's a great one and it's one that we've talked about. Our belief is, we're right-minded to continue to invest. You're not going to see us invest that heavily in new DWR stores next year. So that is -- part of our thinking is that, we were heavy this year, we're going to try to allow the business, if you will, to kind of get its legs under a bit and we expect to see operating margin expansion and improvement as we walk here forward over the next couple of years. And our belief is, we can drive this business to high single digit operating margins over that time horizon, over the next two to three years, and along with very healthy top line growth. And if you just run the math on that, that's meaningful process contribution to the overall enterprise. So, Andi, you might be add anything to that.

I agree with Jeff on the top line growth and I think some good news for DWR is definitely that, but also as we slow down the expansion of new studios and we have studios that are coming to maturity, we see them really start to soar in their 18 to 24 months post opening. So we'll start to see that profitability come in as their store start to mature. And then as we start to invest in the HAY opening, we really believe that one of the magic parts of the HAY brand is that it has such a digital following and we believe that this brand will be highly digitally native. And as we invest in Chief Digital Officer and technology around our retail and e-commerce businesses, we'll build a lot of revenue and volume from that as opposed to just opening bricks and mortar stores. So we'll be very strategic in where we're opening bricks and mortar to really balance that pre-opening and operating expense there and then build up the digital side of the business as well. So agree with everything Jeff said. I think we'll see it level out, but we will still be in investment mode as we go into next year, but we should see a higher operating income gradually over the next year or two in the retail and consumer business.

And maybe to talk a little bit more to the near-term there and maybe I missed this in the commentary, that comparable growth, that DWR was pretty low in annualized sales per square foot dropping year-over-year, maybe square that with kind of the long-term investments and all the moving parts that you discussed when you were answering Budd's question.

Steven, this is Kevin. There's a couple of factors that were driving that. One, as those of us in the Midwest are well aware, there were some weather-related elements that occurred over the quarter. So if you looked at our comparable brand growth, which was up one ahead of high comp against last year, but weather was an impact. You could probably add another 200 basis points to the comparable brand growth, if you factor that out to more normalized level. In addition to that, the way some of the promotions paced in a little bit this year versus last year, there were some timing elements that factored into the numbers as well. So overall, as we mentioned in the prepared remarks, it's the 12th straight quarter of comparable brand growth. But to your point, there were a couple of factors driving it a little lower than what we had been running at.

Thank you [Operator Instructions]. Our next question comes from the line of Greg Burns with Sidoti. Your line is now open.

To take a little deeper on the consumer side of the business and you talked about all the investments you're making and some of the reasons that margins are a little bit more compressed than we would have thought, but you were a couple of quarters ago engaged with an outside consulting firm on a lot earlier to a lot of efficiency initiatives. I just wanted to get an update on how is that going? Is there still room on that? Have you completed those initiatives? And are you just -- do you have just so many offsets now that we're not really seeing the benefits of those?

We definitely have been making headway on that. Unfortunately, as you -- as we said it, as I walk you through those components of gross margin compression this quarter, [Technical Difficulty] has largely been overshadowed. But I can tell you, we're at an annualized run rate of benefit from that program that we estimate to be around $12 million a year. We think there's more room here. In fact, our project estimates had a much broader range. And so we are keeping the pedal down on driving further benefit from those programs as we move forward and we think we're gonna get some. As Andi described to you, the impact of the higher net freight costs, that -- it's been one that has hurt us and we have to take a hard look at everything from pricing strategy there to -- and that includes, by the way, the impact of HAY coming into the overall mix of that business. But don't underestimate the impact of those kind of capital items that I talked about, the mix, the higher contract project mix in the storage cost, those are meaningful impact to the quarter and absence those I think we would have felt -- we would have all felt certainly better about the overall profitability business. But we're making headway, it's real, we can see it, by the way, you can see the benefits from supplier negotiations in the invoices. So we know it's real. The price, we took pricing action, but I guess that I think there's more room.

And it's feels like you have a good handle on the gross margin and offset inflation, what's your view on price increases this year or looking forward to your standard, end of the year price increase or do you have any other pricing actions planned? Thanks.

I would say, at this point, we would expect to stay on the same cadence. Now, what are some things that could cause us to move off of that, there's this big question out there still around what the plan will be for tariffs. And while we're all, I think, optimistic that we're gonna get to a resolution on this, that will ultimately, hopefully, help reduce the overall drag from the tariffs on our margins that we felt all throughout Q3. But in the event that they were to go from the 10% level to the 25% level, we would have to take a hard look at them and consider it. But absent that kind of a move or something on the commodity front, we don't foresee. I think we're under our normal cadence now.

If it does go up to 25%, I mean, do you think you'd be able to, I guess, fully offset that increase or what capability to pass that along to the channel?

Well, the first thing we would do, Greg, is what we did when the tariffs were initially announced. We would take a hard look at the entire value chain with suppliers and we have great suppliers and we worked very hand-in-hand with those folks to try to, in many cases, share the "pain," and we would certainly have those conversations. But I think if it were to go to that level or that magnitude, there are some other levers that we can pull with respect to sourcing up to and including alternate supply. We've already done some of that, I would say, on small scale examples. But we have a whole team of folks that spend a great deal of time looking at this and we have a playbook that we would pull out, that would involve some of those actions. And then pricing would be one that we would take a very hard look at. But as you know, Greg, it's challenging in this business [Technical Difficulty]…

Thank you. And we have a follow up question from the line of Budd Bugatch with Raymond James. Your line is now open.

Can maybe we get an update on POSH and how APAC is doing, how Asia Pacific is doing, and how that's factored into the results in the quarter?

It's been a shining star for us, all year and actually for the last couple of years. The team, we have -- I got to credit Jeremy Hocking, the guy who who runs that business for us and his team. He's got a terrific group there and they're just executing kind of on all levels. And the business in China has been very strong for us, as a rule for several quarters in a row. So -- and as you know, Budd, from past conversations, through the POSH acquisition, which happened several years ago, we got a couple of things that really benefited us. We got access to high quality dealers and distribution in that all important China region. And in addition to that, we got access to products that were priced appropriately for that region. And the combination of those products, along with Herman Miller branded products that are made in China, it's been a powerful combination and the business is doing terrific.

I think the product development innovation that we got from POSH, Budd, has been a real boon and a win for that fast growing region. So many of those products we localized, as Jeff said, we've also been selling quite well in China. This is one of the areas where we'll be expanding dealership and expanding focus. I had been there actually several times now. I'm quite impressed with where we are in China and we continue to see year-over-year growth there. APAC, in general, including India, are areas of growth for us.

And in part of our profit optimization work, Budd, involved a consolidation effort where we're combining two factories in China, one that was formerly a Ningbo and then in the POSH factory that we acquired in Southern China in Dongguan. And we've combined those two locations and really it was this past quarter that much of that work was done. It's still ongoing, it's not complete. But I can tell you that the team in Asia is really, really pleased with the level of productivity that they're seeing in that factory and the overall margins that we're getting out of the Asia business. And we think there's upside to that. So that would be one of those that I would point to in the profit optimization work. That said, we think we're running ahead of schedule and we think there's further improvement to be seen. So that's all part of the Asia operation for us.

And you didn't consolidate the Shenzhen factory into Ningbo? I'm trying to remember which way it went?

No, we went Ningbo to Dongguan.

So all of the production is now in Southern China and you sold the Ningbo factory? Will you able to get that done?

Those facilities were lease facility, Budd.

And talk a little bit about, if you would, what e-commerce looks like in the quarter and what the prospects of that going forward are?

E-commerce channel is growing forth. But we haven't sized that. I think I got the question last quarter on this. So we haven't really disclosed the exact percentage of our consumer business for e-commerce. But it is has been a very fast growing channel for us and has continued to be in the third quarter, so good traction there. HAY is very early days for us. Andi, I don't know if you have anything to add on that…

HAY is actually well ahead of top and bottom line plan and I would say from an e-commerce perspective, outpacing the market from a trend standpoint.

Thank you. And I'm showing no further questions. So, with that, I'll turn the call back over to President and CEO, Andi Owen, for closing remarks.

Well, thanks, everyone, for joining us on the call today. We really appreciate your continued interest in Herman Miller and we look forward to updating you again next quarter and hopefully at our Investor Day on May 9th. Hope you all have a great evening, and do well. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.